V.15:12 (544-547): Time and Options Probabilities by John A. Sarkett

Item# \V15\C12\TIMEAND.PDF

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Product Description

For traders who want to use options to hedge their long
positions, here are the formulas for calculating the prob-abilities.

What’s the probability that Intel
[INTC] will be above 110 at a
certain point? Three months from
now, six months, a year? If you
were to ask random-walk partisans,
they would be likely to tell
you, “There’s no way to know.”
You would get the same answer
from those who disparage market
timers. But change the time
frame to a more manageable short-term window — say, the
week or two before the very next options expiration — and a
little-known formula would be able to give you the exact
mathematical probability.
Time is the key. Filter with technical indicators such as
trend, moving average, oscillators and your own judgment,
and you can use the estimated probability to your advantage
by selling out-of-the-moneyÝ option premiums. Typically,
the odds will favor your sale about 66% of the time, leaving
just a 33% possibility that the buyer on the other side will
actually call away your stock. Lending further credence to
this strategy, economists at the Options Clearing Corp. report that, on average, 67% of all options expire at zero or at a loss.

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